Your small business and your divorce

If you’re beginning the process of divorce, you probably know that you and your spouse must divide property according to California’s community property laws. The division of property is often the most complex part of any divorce, but it can be especially tricky when your property includes ownership of a small business.

Community property and separate property

California follows the community property model of property division in divorce. Under this model, nearly all assets and debts acquired during the marriage are considered jointly owned by both spouses. Theoretically, this means that when they divorce, they can divide everything 50/50. In practice, property division doesn’t boil down to splitting everything in half.

One reason for this is that assets and debts acquired before the marriage are generally considered separate property, which does not have to be divided in divorce.

If you owned your business before your marriage, does this mean you won’t have to divide your business in divorce? Not necessarily.

Generally, if the value of your business has increased during the marriage, this increased value can be considered community property. This is particularly likely if your spouse contributed to the growth of the business. This could mean your spouse helped you run the business, or indirectly contributed to the business by, for example, staying home to raise your kids while you ran the business.

Three questions

So, business owners going through a divorce can start the property division process with two questions:

1. Is the business subject to property division?
2. If so, what percentage will go to the spouse?

If you acquired to business during the marriage, it may be considered 100% community property, which means you and your spouse can negotiate the way you will divide it. For instance, you may decide on a 75/25 split.

Now, there’s a third question: What do you want to do with the business?

Three options

You have three main options:

1. Sell the business and divide the proceeds according to your divorce settlement. For instance, if you decided on a 75/25 split, you will give your spouse 25% of the proceeds from the sale.
2. Keep the business with your ex-spouse as a co-owner. Many people going through a divorce would like to spend as little time with their soon-to-be ex-spouse as possible, and so they find this is not an attractive option. However, depending on the circumstances of your business and your relationship with your spouse, it may not be such a terrible idea.
3. Keep the business and buy out your spouse.

The third option is attractive for those who would like to continue running the business after the divorce, but it comes with some complications of its own.

For example, let’s say you’ve negotiated and resolved that your spouse should get 10% of the value of your business. But what is the total value of your business? For this, you may need to hire valuation professionals.

Depending on the total value, you may then have to come up with a large amount of cash. You may have to secure financing just to make the payment to your spouse. The financial maneuvering here can blur the line between your personal finances and those of your company, and the legal issues blur the lines between family law and business law.